What’s there in your money box?

When I began doing a personal finance show on TV about seven years ago, I was inundated by stock tip seeking questions. But I was clear that what we were setting out to do was financial literacy and not giving cheap stock tips. It took work to nudge the questions in a particular direction, but within a few weeks of the show, the questions changed. They changed from asking if they should buy or sell a particular stock to the “I have so much money, what product do I buy?” questions. A product sales driven model of retail finance, fuelled by commission bearing products, had framed the market in a certain way. So instead of using products to solve financial problems, manufacturers and sellers aim to soak up all the surplus money by selling a product that gave the highest commission to the seller. Smart Money on Bloomberg India TV is my fourth show and we (co-anchor Vivek Law and I) began with portfolio-driven questions—where viewers were writing in to ask if their portfolios were Ok. And now within 15 weeks, we see a pattern emerge that tells me that people are finally asking the right questions. Though half are still driven by questions around a portfolio check, the rest deal with issues around individual financial situations. We’ve moved from trying to find a product to hit with our savings to a place where we want a plan that we can follow for the rest of our lives.

One piece of advice that I found works across situations and questions is the answer to the question: what is in your money box? If life was a game, (and may be it is) and we were allowed just a few financial products to fill our money box with, what would we pick? Look at it as a box that has several smaller compartments. The first square you fill is labelled insurance. Unfortunately key role of insurance in a money box has never been explained by the seller. Look at insurance as the key that allows the rest of your money to take higher risk. Most people keep cash in the savings deposit against a future emergency. Most of these events are around an accident, a job loss or a medical emergency. We can use basic insurance covers to help a family tide over such emergencies and not have to dip into the savings pool. We need to buy basic covers to fill this insurance square in the money box. In goes a basic medical cover (at least 2-5 lakh per head), a term life cover (for the person whose salary makes the house go round, it is seven to 10 times the annual income), a basic household insurance and a basic vehicle cover.

The next square is simple, and it is labelled “emergency fund”. Fill that with three to six months of living costs. If you are in risky private sector jobs and are uncertain about the future, go up to a full year of spending money in this box. Next, we fill the square labelled zero-risk investments. This is the core of your portfolio and has your Employees’ Provident Fund and Public Provident Fund in it for those in their earning years. For a certain age and stage, we may have other zero-risk products such as fixed deposits and Senior Citizen Saving Schemes in it. The next square is finally the product that has so much advertising attention—but this comes almost at the end of the financial planning exercise and has to be filled with extreme caution. This is the market-linked part of your money box. You fill this with equity exposure and not direct stocks—remember the money box works for average people like us, and not masters of the universe who make a living out of trading on various markets and fill their day with just that. You begin by filling half the risky assets square with lower-risk products such as balanced and large-cap funds. The next half can be made up of large- and mid-cap funds and mid- and small-cap funds. The exact proportion of fund types will change along with profile. The more risk you are able to take, the greater the allocation towards the riskier funds.

Notice that I have not put in squares for real estate and gold. The average urban mass affluent Indian family is already over-exposed to the two, so I can only say that no asset class goes up in a linear way—just because there has been no downturn in the two does not mean that prices will not be volatile. The last square is called Will. At age 35 you may not see the point of writing and registering a Will—we all plan not to die. But dying intestate creates a mess that you leave behind for the family you profess to love so much. You don’t want to look down from above and kick yourself for not doing it when you had the chance. So, just do it.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com